Despite economic projections published since the turn of the year tending to follow the general theme of progressively upgrading UK growth prospects, the IMF’s World Economic Outlook released yesterday, appears somewhat less positive than others. Whilst the projections for GDP did mark an improvement on the IMF’s prior forecasts, they continue to show the UK economy shrinking over the course of 2023, in this instance by 0.3%. This is more negative than many other forecasters, including the OBR and Bank of England, who now see the UK avoiding recession despite the rapid monetary tightening and cost of living pressures that are squeezing consumer spending. As to who is right and who is wrong, that will be seen over the coming months. But one person that might be looking to get a head start on that question is Meghan Greene, who was also announced yesterday as the replacement for Silvana Tenreyro on the Band of England’s Monetary Policy Committee. Tenreyro, who has two more policy meetings left on the MPC, is well known for her dovish policy stance. Whilst we are yet to see exactly where she lands on the spectrum of monetary hawkishness, it seems highly unlikely that Greene will be as dovish as her predecessor, nor will it significantly alter the stance of the committee as a whole given Tenreyro’s previous position as a policy outlier. For markets, yesterday’s news from both the IMF and BoE was hardly earth shattering, with sterling content to trade back towards the levels seen before the easter break against the dollar, whilst moving sideways against the euro. In the absence of any external shocks, then with a quiet data calendar this trend looks set to continue again today.
Market action yesterday suggested something of a catch up effect was at play following a prolonged market closure, with the euro spending most of the session retracing ground lost to the dollar over the course of the Easter weekend. It was in this context that EURUSD futures volumes were trading around 20% above average levels and Eurozone government bond yields jumped, with between 13.8bps (Netherlands) and 17.1bps (Italy and Spain) being put back into the 2Y. The rise in bond yields came as markets reassessed expectations for the ECB’s hiking cycle following the release last week of CPI data, which pointed to high and sticky underlying inflation across much of the eurozone. As a result, option implied expectations for the ECB’s May decision priced a 25bp hike for the first time since the ignominious collapse of Credit Suisse that sent markets into a tailspin and investors fleeing for safety, as concerns of a financial crisis abounded. This modest return of risk sentiment was not just limited to markets, with the Sentix investor confidence index showing an improved reading of -8.7 in April, up from -11.1 in March, and retail sales falling by a smaller than expected 3.0% YoY. Today, the release of the US March CPI (see USD) will be the main driver of market price action. Whilst the disinflationary trend in the headline reading is expected to continue, core inflation is likely to remain elevated and as such we anticipate this release will continue to tip the balance towards a final 25 basis point hike in May from the Fed. Beyond that, today’s speech by Villeroy de Galhau at the Peterson Institute’s Macro Week 2023 at 20:15 CET will be the only event scheduled for the eurozone today.
On the whole, yesterday’s session wasn’t anything to write home about. The dominant driver remained the retracement of the reaction to the payrolls report during the holiday-thinned sessions in the days prior, albeit with slight flurries of dollar strength throughout the US session. That said, while the broader macro backdrop provided little excitement, there were a few idiosyncratic stories at play. Notably, the Norwegian krone led losses against the dollar, with no obvious catalyst outside of its inflation release for March. Printing up from 6.3% to 6.5% YoY, the data did little but compound the need for further policy tightening from the Norges Bank. However, this doesn’t necessarily equate to a weaker currency, especially seeing as the more hawkish Norges Bank in weeks prior supported a wave of NOK strength. Perplexing price action in the krone relative to its fundamentals has been put down to thin market liquidity by most local traders, which is all well and good, but does mean a sharp retracement could be in store should the currency drift too far from its fundamental anchoring point. Meanwhile, data out of Switzerland showed sight deposits at the SNB fell the most since September, suggesting the central bank was actively intervening to strengthen the franc in the week ending April 7th. The franc rallied 0.3% against the euro following the release, and after some decent movement throughout the session, it closed out the session close to its intraday high. The big story was out of Brazil, however, with the real closing the session nearly a percentage point higher. The main catalyst was cooler-than-expected inflation data for March, which not only increased BRL’s positive real carry but could also play a major part in easing tensions between the lower interest rate favouring government and the still-hawkish BCB.
Today, the playbook for markets will be a better-known one as expectations for the Fed will be back in the driving seat with the release of March’s CPI data at 13:30 BST. Following Friday’s jobs report, money markets are pricing in a 75% probability of a final 25bps hike from the Fed on May 3rd, however, recent commentary by Fed officials suggests the consensus within the FOMC isn’t as strong as markets are suggesting. This was exemplified yesterday as calls for further action to bring price pressures under control by New York Fed President John Williams contrasted directly with those from Chicago Fed President Austan Goolsbee, who called for “prudence and patience” in assessing the economic impact of tighter credit conditions. As we highlighted yesterday, there remains a credible risk that the Fed does pause at their next meeting should they see something within credit markets that concerns them. However, with an asymmetric information barrier, markets will only be able to price what they can see, which by-and-large is aggregate credit and economic data. To that end, today’s inflation report still holds some gravity. Should the pace of core inflation meet or beat expectations of a 0.4% MoM increase, markets will likely put more weight on the argument presented by Williams, which could provide some support for the dollar in the near-term.
High beta currencies led the retracement against the dollar yesterday as liquidity conditions returned to normal. The loonie was no exception to this as it traded 0.33% higher in what was a largely benign day in terms of cross-asset price action. Today, volatility should pick up for the USDCAD pair with events both sides of the border holding a significant bearing on the future path for US and Canadian monetary policy. First up is US CPI for March at 08:30 ET. As we mentioned in the USD section, should core inflation continue to exceed expectations and sustain an unpalatable pace of growth, it will likely force the Fed into another 25bps hike in May. Furthermore, if credit conditions haven’t tightened considerably since the recent turmoil in the banking sector, the sustained pace of price growth could also embolden Fed officials to tighten further at future meetings. Shortly after the release of US inflation data, the Bank of Canada is set to announce its latest policy decision. At 10:00 ET, the BoC will not only release its latest policy statement, but also its latest monetary policy report. This is where we expect the bulk of the market reaction to emanate from given expectations are firm for the BoC to keep rates on hold at 4.25% and recent data poses no threat to this. In the MPR, the BoC will not only provide fresh inflation projections, but it will also likely update its estimates of neutral rates and potential output. Ultimately, the combination of these projections should inform how the BoC is currently viewing the economy after inflation data continues to show some signs of persistence and growth conditions have held up slightly better than they had expected in January.